Wednesday, January 16, 2013

Gold, gold, GOLD!!!

The unprecedented scale of the [European] debt crisis means that inflation and currency devaluations will almost certainly result from the crisis. Savers and those on fixed incomes will be very vulnerable as they were in the stagflation of the 1970’s and in the economic meltdowns seen in Argentina, Russia and in Belarus as we speak...

However, the US is itself facing a debt crisis which is also of a monumental scale. It is of a scale that it cannot be resolved by the usual kneejerk resorting to the printing presses and today’s equivalent panacea - computer credit creation...

Ron Paul gave another perceptive interview to CNBC yesterday and warned of hyperinflation and the possibility that the dollar could become worthless.

When asked how high the gold price would go and why, he responded:

“well, the question is how much lower is the dollar going to go in purchasing power? and I said to infinity unless we change our ways."

Here, courtesy of Goldprice.org, is a picture of gold prices over the past two years. Note that the Zero Hedge post appeared a few months after the peak:

For comparison, courtesy of Yahoo Finance, here is the S&P 500 over the same period:

Now, if you believed the Zero Hedge post, and immediately went out and invested $100 in gold, you would now have $17 less than a friend who ran out and invested $100 in an S&P index fund.

On March 6, 2012, Zero Hedge ran a post of its own, titled "Stay Long Gold", citing Morgan Stanley. If you believed that Zero Hedge post, and immediately went out and invested $100 in gold, you would now have $9.60 less than a friend who ran out and invested $100 in an S&P index fund.

Goldbugs and Zero Hedge fans who read these facts tend to make one or more of the following responses:

1. "You're cherry-picking. Go back 5 years and see how much gold has beaten stocks. Or 10 years."

2. "Look how much money central banks are printing. Obviously, fiat money is going to become worthless, and gold will be left as the one true form of money."

3. "OK, dude, whatever you say, look how much money I made investing in gold! Who's the fool now, huh?"

4. "Gold and stocks aren't substitutes. Gold is an important part of a diversified portfolio."

Number 1, of course, is just counter-cherry-picking. The S&P has beaten gold over every 30-year period of history, ever. Why 30 years? Well, it's a standard "long-term" investment horizon. But the same is true for 40 years, 50 years, etc.

Number 2 really fails to understand a basic idea about financial markets. If it's obvious that central bank money-printing will drive up the value of gold, why isn't that fact already incorporated into gold prices? In other words, the only central bank actions that should make gold prices rise are surprise actions - like printing even more money than people thought.

Now, Zero Hedge and the whole "goldbugosphere" tries to push the idea that they understand macroeconomics better than everyone else out there - that what is "obvious" to them is not obvious to most of the world, which is still in thrall to (Keynesians, neoclassical econ, Xenu, take your pick).

But this also does not mean that gold prices can be expected to rise. Because even if it's true - suppose goldbugs are much much wiser and savvier than the rest of humanity - the only reason goldbugs wouldn't have already been able to push gold to its optimal price would be if goldbugs were liquidity constrained. But if that's the case, the only people who will believe in the predictions of higher gold prices will, by definition, be people who are unable to take advantage of their superior wisdom and savvy.

As for Number 3, note how it exploits a fairly well-known behavioral bias: Envy. When the gold flogger proudly boasts that "I made a fortune in gold!", people feel like unless they do the same, they aren't as smart as the guy making the boast. There's a knee-jerk psychological reaction of "If you can do it, well by golly, I can too!"

But notice how crazy this is. Even if you're as smart as the goldbug, it doesn't mean that you can replicate his success just by buying the same thing he bought. In fact, chances are you can't. Chances are, the huge gains that gold has seen over the past decade were a one-off event, not to repeated anytime soon.

Investing is an area of human endeavor in which copying other people is not a surefire route to success. This makes it different from many other areas of life. If someone says "I tried the Atkins diet and I lost 40 lbs.!", then - assuming they're not BSing you - there's a pretty good chance that you too can lose 40 lbs. with the Atkins diet. Just copy best practice. But in investing, "copying best practice" by buying what the winners buy is actually just herd behavior, and is likely to make you lose money. Gold is not the Atkins Diet.

Of course, Zero Hedge knows this, and it knows that by creating this myth that "anyone can get rich by investing in gold", it can play on your own behavioral biases. Note that this is not the only bias they cleverly exploit - they also try to play to your masculinity in order to strengthen your overconfidence.

(As for Number 4, well, it might be right. But you shouldn't need Zero Hedge articles to tell you to diversify your portfolio! And let's be real: articles with titles like "Gold headed to infinity" and "Stay long gold" are not really articles about portfolio diversification.)

Note how there's a common theme here: Past performance is no guarantee of future results. According to "efficient" markets theory, past performance is unrelated to future results. According to behavioral finance research, future results will actually tend to reverse past performance, possibly because so many silly people exhibit herd behavior and jump on bandwagons.

Of course, as anyone knows who has ever tried to reason with goldbugs, this post is likely to fall mostly on deaf ears. But if you've had Zero Hedgie types brag to you about how much money they made investing in gold, don't feel bad. Look at their results in the last year and a half. And quietly snicker.

Update: as a commenter pointed out, Zero Hedge is probably just "talking their book". They own a bunch of gold, so right up until the point they're ready to dump it, they'll say "Buy, buy, buy!" Then they dump it, then they start yelling "Sell, sell, sell!" If it works, it's the old pump-and-dump scam, which is illegal when you do it to a stock, but perfectly legal to do when it's a whole asset class, like gold. Of course, Zero Hedge probably doesn't have a lot of ability to move gold prices, but why not try? In the meantime, they make money selling ads for their website. There's really no downside for them.

"On the other hand, due to gold's volatility, gold futures are an excellent trade."

This doesn't compute. Futures track spot because they are contract for a *future* delivery of *spot* gold. The basis diverges due to interest rate volatility, but I'm pretty sure that's not what the comment was about.

Maybe options on gold (spot or futures, for that matter) are a good investment, but that's merely taking a view on volatility. Futures do have the value of being inherently leveraged, but not at all obvious that this makes it an "excellent" trade (vs self-leveraging, see also Modigliani & Miller, et al).

Or maybe this is a troll, in which case, all I can say is, "you gAUght me dewd! go0d jAUb!"

I'm not even particularly keen on gold as part of a diversified portfolio.

It's a weird asset class. Almost all possible appreciation potential stems for it's special role as a perceived refuge during a fight to safety. But there isn't any real reason that gold, especially at these price levels, is safe, except that a lot of charlatans and crazy people think it is safe and thus will flee to it.

I don't like investments whose potential for returns rely on irrationality. There's certainly a role for speculators in a market like that, but I don't like it for the average investor.

But what's even weirder to me is that relatively sophisticated types still see it as a hedge. A hedge for what?

Almost all possible appreciation potential stems for it's special role as a perceived refuge during a fight to safety

Gold is a real commodity used in real products (Jewelry, Electronics). It can appreciate due to supply and demand, just like anything else. Take a look at Professor Hamilton's analysis here to understand how little speculators in the USA have to do with the price of gold. As Prof Hamilton points out, "The surge in income from the emerging economies rather than U.S. monetary policy seems the most natural explanation for recent moves in the real value of gold."

Adam, everyone I know who owns gold and cares about counterparty risk has full physical possession of their gold. This is why the notion of a gold ETF is kind of absurd. There is generally MORE counterparty risk to a gold ETF than to a traditional portfolio of shares.

Didn't Paul Krugman show that Gold is real interest rate sensitive (because it doesn't give a return - low or negative real interest rates make it more attractive). So it can be seen as a sort of depression hedge rather than an inflation hedge.

Noah, your are missing the point completely! :)The whole point of posts like the ones you criticize is to get more people to buy gold, therefore raising its price further and benefiting those who bought already. It is not much different than a Ponzi scheme.

P.S. Darn, and I promised myself not to piss off any people on my birthday!

It's certainly been interesting seeing gold hovering between 1500-1900, and it has defied a lot of people's predictions including my own. My expectations were that gold would be around 1800-2100 now, based on demand from East Asian central banks, fear of counterparty risk and contagion, and weakened growth in industrial output and GDP compared to credit growth.

The fact that gold has underperformed my expectations doesn't really surprise me, though. Markets and human behaviour are hard to predict. Industrial output and GDP have rebounded more strongly than I expected. Central bank efforts to prop up weak sectors have been more successful than I expected. The Eurozone has been less contagious than I expected, and the middle east and Eurasia less geopolitically explosive. (Of course, all of these factors could change tomorrow).

But the fundamentals haven't really changed. If you're looking for a liquid asset free from counterparty risk, and a hedge against currency risks, geopolitical tail risks then a lump of gold or silver is still very viable. Gold is only going up nominally in the long run. Whether it goes up faster than GDP, industrial production, stocks and housing prices is another question. Is it stupid to only own gold, and not other assets with different risk characteristics? Yes — but I never advised anyone to do that, and I never did that myself. Is it dangerous to try and get rich by trading gold futures with leverage? Yes, and I never advised anyone to do that either. Is hyperinflation of the dollar inevitable? No, but it is important to note that that tends to be the way that pure fiat regimes end, and it would be foolish to assume that America will be different (although that could be a very, very long way away).

The bottom hasn't fallen out of the market for gold. This isn't a crazy pump and dump. Zero Hedge wasn't selling a bubble. Gold wasn't "in a bubble". It hasn't fallen precipitously to $300 an oz, or $500 an oz. It has hovered. The worst that could have happened to an investor at the intervals you point to is they could have missed out on some book gains in other asset classes. In six months or a year the picture may be very different. If gold had shot up to $2500+ an oz, I'd be worried that we're set for a big fall. At $1600 an oz, that's fine. There are plenty of buyers at this price level including central banks and some pension funds and endowments and new gold discoveries are far less frequent than ten years ago.

I don't know where gold is going in the next year or two. My guess is slightly up. Maybe we'll end 2013 above $1800 or $1900. I could be very wrong.

I guess I see the current epoch of development ending in one of two ways — either a wonderful new era of mass abundance based on super-technologies that make scarcity pressures history, or civilisational collapse. In the first case, if I and much of the rest of global society have local energy generation and storage, hydroponic greenhouses, and molecular manufacturing tools (etc, etc) whether I am using the dollar or gold or something else as money is not really worrying to me.

In the second case, I look at Rome and Song Dyanasty China, both ending in massive hyperinflation (albeit after very many years of slow decline), among very many other historical cases of civilisational decline. If our civilisation is going the way of past extinguished civilisations (whether that is a function of climate change, peak resources, or war, or natural disasters, or any kind of massive civilisation-altering scenario), gold has historically been a far better thing to hold — because it has retained its purchasing power — during times of civilisational upheaval than fiat currency instruments whose purchasing power is tied up with the government that issues them.

In the present epoch, yes, gold has been outperformed in the long run by stocks although it outperforms during times of turmoil, e.g. the late 70s, the 00s, etc. But yes, fundmentally It's not a productive asset to hold in the long term, because it doesn't create a return. Maybe the "time of turmoil" is over for now, and we are going to see another gold bear market — through I suspect not. I sense that we are moving toward the end of the present epoch.

I stopped buying gold around $1000-$1200, so quite a long time ago. I don't know when or if I will resume, but I am pretty happy with my "hedge". I could cash out profitably, even if gold falls quite a long way. Right now I am waiting and seeing how the future pans out.

Maybe I'm buying into some nutty narratives, but actually one of the key narrative forces that has driven gold up to where it is now is the idea that America and probably civilisation in general is moving toward collapse. That's what most people on Zero Hedge believe, to a lesser or greater degree. I don't necessarily buy very far into that, but I think there are lots of real dangers — climate change, peak resources, war, natural disasters, global trade shocks, financial crises, etc. If I start seeing more evidence that we're going in the right direction — successful private deleveraging, growth in new technologies (3-d printing, renewable energy), less geopolitical tension, etc, then I will sell most of my gold and silver and move on.

Maybe I'm buying into some nutty narratives, but actually one of the key narrative forces that has driven gold up to where it is now is the idea that America and probably civilisation in general is moving toward collapse.

Well, there's the question of whether, if America did collapse, people would just go around confiscating gold with guns.

That's what a lot of people on ZH say. Canned food, bottled water, water purification tablets too.

I don't emphasise this stuff, because I see these kinds of problems as very tiny possibilities in the short term. I think we're a long way away from collapse. If we don't reach energy sustainability in maybe 20+ years, it becomes a bigger possibility with climate change effects, etc, but not right now. My personal case for buying gold was always more one to do with financial system problems, counterparty risk, currency risk, risk of geopolitical shocks.

But really, I would like to get to a place where I am happy to sell gold. I'd like to get to a place where I look at the global economy and say "This is becoming more sustainable. It looks like there's rosy times ahead and all these people obsessing over gold and ammo are wrong." I'm more optimistic than I was two or three years ago, but I'm not yet at a place where I'm optimistic enough to sell.

My personal case for buying gold was always more one to do with financial system problems, counterparty risk, currency risk, risk of geopolitical shocks.

I'd rethink some of these. Counterparty risk? Stocks can't default. Currency risk? International diversification is a far less risky way to hedge against that. As for geopolitical shocks, I think the connection between these and gold are rather tenuous, relying as they do on vague theories...

But in any case, this post is not about risks that are hedged by gold. It's about the notion that past gold runups indicate future gold runups, which they don't.

"No, but it is important to note that that tends to be the way that pure fiat regimes end, and it would be foolish to assume that America will be different (although that could be a very, very long way away)."

Yes, look at the horrible hyperinflation brought America to its knees after the Civil War (which was financed with pure fiat money).

I love it when people point out that pure fiat regimes always come to an end. Of course, this ignores the obvious fact that all regimes come to an end. Or maybe there's some wonderful, prosperous nation of Goldistan that's been around for millennia but covered up in some big fiat money conspiracy?

All regimes come to an end. The difference is that when a fiat regime ends, holders of its currency are left holding a mich bigger bag of seigniorage. Gold's purchasing power is independent of state or bank sanction. Egyptian and Roman gold retained a lot of purchasing power.

I'm not sure what digging gold coin hoards up out of the ground really proves. Yes, sometimes small amounts of gold were buried and lost to the mists of time (only to be found again and lusted after). All gold ever mined amounts to an 82x82 cube. As far as I can tell, that means that a much larger component of the Roman and Greek money supply (as well as the precious metal hoards of many, many other regimes) has wound up today sitting in bank vaults at places like Fort Knox, the NY Fed, the Buba, the PBOC and the Bank of England. That it's still treated as a store of value by the biggest and most powerful governments in the world thousands of years after the collapse of the regimes that mined that gold. And the rest is jewellery, another (much less liquid than coins and bars) store of purchasing power. I find that fact pretty amazing.

We don't actually know that Rome went out in hyperinflation. We're fairly confident that the Third Century Crisis was inflationary (among many other things), but the Western Empire recovered from that. There are strong arguments that the end of the Western empire was deflationary.

Like coin hoards. What kind of fool hoards fiat currency, of all things, in a hyperinflation?

I'm not sure what is meant by "optimum" price - there are no discounted cash flows and few industrial users of gold. Second, it's pretty obvious that gold doesn't have much to do with inflation, but instead with real interest rates - see Gibson's paradox and the gold standard. Basically, gold is an alternative to income producing assets, and when income is scarce, gold trades as the equivalent of a perpetual long bond. Third, if the blogger is going to taunt the gold bugs, economists can also be psychologized: the EMH is sour grapes (I can't have the grapes, therefore they must be sour. Sour grapes doesn't mean "I'm sore because I got the sour grapes," which is what I used to think).

and lets not forget my personal favorite: tyranny is coming and we need to stock up on gold and guns because history has shown time and again that the next hitler is just around the corner and if we cannot shoot him with our AR-15s then then we'll need to have gold to hedge the ensuing hyperinflation. no, really, there are a lot of batshit right wingers who think this (about 7:14) http://www.thedailyshow.com/collection/422810/the-daily-show-covers-gun-rights/422699 .

LOL! Warren Buffet has the best explanation about why gold is a crummy investment in the B-H letter to shareholders last year. See page 18 - http://www.berkshirehathaway.com/letters/2011ltr.pdf Ever since we went off the gold standard, gold has simply been an object for speculation with little if any tangible worth.

Couldn't personal fiannce be boiled down to two pages, for 90% of the population, stating: 1. Create an emergency fund of 3-6 months worth of expenses. 2. Invest 10-15% of your income in a low-cost Vanguard Index Fund based upon your desired date of retirement. 3. Buy a house if you can with 20% down payment.

It seems like a lot of middle class people are wasting their time in finance...

Well, one could quibble about the house aspect. Add up downpayment + (mortgage payment - rent) + property taxes + maintenance, etc. and it's possible that you'd be better off renting for much less and investing the money you'd save in your well-diversified portfolio.

Not always though. It depends on rental rates, housing prices, interest rates, etc. The MID makes a house more attractive too, but mainly, it's a self-discipline issue. Lot's of people won't invest that "extra" money, but they will pay a mortgage. It's a commitment device. If you have financial self-discipline, putting that money into your portfolio may gain you more than what you' get in equity from buying a house. Or maybe not.

It is crazy though that people who make 50-100 grand a year, in low cost of living areas, will skip a 100% 401(k) match that is automatically vested, in preference to buy a house in a middling neighborhood.

The self-discipline issue is a point I never thought about before so thanks for highlighting it!

The house is the one illiquid asset that you can sell profitably (well, for cash in any event) at EOL. You can't sell your rental property.

If you're never going to be liquidity-constrained, you probably don't need what Brad DeLong correctly describes as a "forced savings program." For the class described above, buy-and-hold applies to real estate as well.

If expected returns on capital fall to 0%, you may as well hold an asset like gold that yields 0% and costs nothing to store. If expected returns on capital fall to -1%, the current price of gold has to spike upwards relative to its expected future price. Gold now promises to fall at 1% a year, which is equal to the expected return on capital. So it is rational to hold gold if you expect increasingly negative returns on capital, and if you believe that these expectations aren't already baked into the gold price.

Isn't that because the ZH tribe are inflationistas and gold is traditionally a hedge against inflation? Though TIPS are a better hedge against ordinary inflation, of course. But then they aren't predicting ordinary inflation. "OMG the dollar will collapse! Hyperinflation is coming! BUY GOLD!"

ZH people are "If this means the collapses of western civilization then we believe in it" so they move between hyper inflation and deflation pretty rapidly. Just like Obama represents both a fascist capture of the state by elite bankers AND the rise of the all powerful Soviet state that will be dominated by party bureaucrats.

I swear to god, if there isnt someone doing a sociology PhD on it they should be.

suppose goldbugs are much much wiser and savvier than the rest of humanity - the only reason goldbugs wouldn't have already been able to push gold to its optimal price would be if goldbugs were liquidity constrained. But if that's the case, the only people who will believe in the predictions of higher gold prices will, by definition, be people who are unable to take advantage of their superior wisdom and savvy.

I'm not sure I follow the reasoning here. For starters, whether or not we suppose goldbugs to be wise or savvy seems irrelevant to me -- surely only the beliefs of investors about the price of gold ten years from now, and not the actual price of gold ten years from now, can affect prices today? Suppose that, instead of just goldbugs in our economy, we have a few different kinds of investors with different beliefs about what gold's price should be. If it is only goldbugs' liquidity constraints keeping gold from reaching the price that goldbugs believe it is worth, then it seems that if we gave goldbugs more money to invest gold would reach the price they expect regardless of whether it is merited. In that scenario, would it be because of everyone else's liquidity constraints that the price of gold does not match other investors' expectations?

It's not that I think that's necessarily wrong, but if that's right, it seems wrong to talk about it as some kind of aberrant and unusual case that investors would be unable to affect the price due to liquidity constraints, if any conceivable price would be proof that some investors can't move the price due to liquidity constraints.

What if gold's runup in the 2000s was because of dwindling supply and increased all-in cash costs, combined with increasing demand from India and China who each represent a big chunk of world demand and are experiencing rapid wealth creation?

No, the point is, why should gold's price runup in the 2000s be an indicator of similar runups to come in the future? It shouldn't...

Oh, I agree with the general point, and almost all of your argument. It just sounded like, in this line, you were claiming that if goldbugs were right about the future price of gold and everyone else was wrong, they should have been able to get the price to rise more now, to the point that they would not expect much additional return. That I don't believe.

It just sounded like, in this line, you were claiming that if goldbugs were right about the future price of gold and everyone else was wrong, they should have been able to get the price to rise more now, to the point that they would not expect much additional return. That I don't believe.

And why couldn't they? Because they don't have the ability to do so...i.e. they are liquidity constrained.

Who isn't liquidity constrained? "Liquidity constrained" seems like the answer to pretty much every question in life. And many of the world's central banks are shifting into gold - are they "liquidity constrained"? There's a saying, don't become the market. Sure, they could push the price to reflect their views, but who would they sell it to? The destination and the path are two different things.

So I did not misunderstand you. Read my original post again. Or tell me which of the following statements you disagree with:

1) Even if goldbugs are wrong about the future and everyone else is right, they would still be able to move the price of gold closer to what they think it should be if they weren't liquidity constrained.2) There are lots of investors who believe that gold is overpriced. The fact that the price of gold isn't lower is evidence that they are similarly constrained in their ability to move the price.3) When investors have different expectations about the future, the fact that some of them will be constrained in their ability to move the price is to be expected and does not say anything interesting about who is right or whether the price will rise or fall in the future.

It's not that the claim that goldbugs are liquidity constrained is wrong, but the way you use it reminds me of the way some economists claimed that it was impossible that housing could be in a bubble because if it were then investors who understood this should be able to influence the price and correct the bubble.

I see a lot of similarities between the promotion of gold and the promotion of stocks (I don't mean individual stocks, but stocks in general). Stock promotion is more respectable, but I'm not totally sure it ought to be. Resources are wasted by gold mining and storage, but resources are also wasted by speculative trading, high cost mutual funds, the IPO->private equity->re-IPO cycle, etc.

Basically goldbugs are attempting to save, invest or save and invest simultaneously (quite a trick) in the same commodity:

Argument 1) Look how gold performs versus . . .

The point is not to buy gold as hedge against dollar calamity, but to use gold to get more dollars as commodity value rises. Obviously someone who thinks the world is going to end will have no interest in this, because the additional dollars they make from trading gold would be useless.

In this argument the value of gold is utterly irrelevant. If the dollar is going to hell then the valuation of gold (in dollars) doesn't matter a bit. You're just trying to accumulate something you can use to buy socks or ammunition or whatever you need to survive after the Apocalypse. In which case you might as well buy tons of socks and ammo and anything else you need before the Apocalypse and save yourself the trouble. Since everyone else saved gold instead, you'll be able to trade your surplus items for all the gold you want.

“well, the question is how much lower is the dollar going to go in purchasing power? and I said to infinity unless we change our ways."

This is pretty dumb, too. It's an argument for bottled water and canned green beans as much as it is for gold. Gold bugs don't seem to get this.

If you think the currency is going to collapse, then you shouldn't gloat about how your asset has gained in that currency. The only legitimate gains to you are real gains: how much your asset has improved against a basket of goods and services you intend to purchase in the future. You can never realize those gains in the currency that's going to collapse because it's going to collapse and an attempt to do so may very well end up as ashes in your mouth.

Fun fact: gold has been more or less stable against staples for the past 200 years. Major deviations from that - like the gold spikes 30-35 years ago and presently - get smacked in the mouth because gold doesn't dividends or retain earnings from a new product it has successfully marketed or anything like that because it's just a shiny metal.

Seems like a waste of a blog post to tell people (again) not to base investment decisions on reading zero hedge. Does anyone take it that seriously? It's like criticising a Dilbert cartoon for being inaccurate. Maybe it will generate more clicks for more interesting articles :)

The entire monetary base is fiat, which has been inflated with a vengeance over the past 5 years, or so (not that we are seeing inflation, by the "official" metrics, but those new trillions of $ will move, eventually; and there has been inflation in essentials). Quite a bit of that of that money, IMO, has gone to support the markets (certainly hasn't made much of a dent in employment).

My point is that intellectually, our monetary system (both creation and distribution), is disingenuous a all get out.

Gold is certainly no worse than a fiat dollar when value is on the line.

I think that as soon as the markets drop (and IF and when the support is taken away, they will), gold will resurge.

The reason I hold Gold rather than stocks is that I believe that before this whole mess is over, 'lll be able to buy one unit ... ish of the Dow with one ounce ... ish of my Gold. This is not an outlandish expectation as there have been a number of times over the history of the Dow when this has been very doable. I really don't care that much if the Dow falls to 2500 and Gold moves up, or if the Dow blasts up to 20,000 with Gold hot on it's tail. My interest is to swap out of my Gold at or near 1 for 1. it's somewhere around 6 presently, when I started swapping out of stocks into physical Gold and Canadian Gas and Oil Trusts the ratio was in the low 40s, so I'm presently pretty happy with the way things are going over say 12 years.

There is very little cost associated with holding Gold either real or opportunity, as earnings are at record highs, earnings per share are near enough record highs and yields are near enough record lows to give me pause. When I see the Dow paying something approaching a 7% yield which it has done in the past, I'll start shopping. Until then, you can keep your stocks, I'm pretty happy with my stack.

This post was part of Barry Ritholtz's linkfest. It will be interesting to see 1 year from now if this post turns out to be a great contrarian indicator....I suspect it will.

Gold has spend 15 months consolidating within a secular bull market. In contrast, the S&P 500 is at a 5-year high and near the top of the secular bear trading range that it hit in 2000 and 2007. After a year of outperformance by the S&P 500, it is probably due soon for a major reversal in relative performance.

All these people are fools. When the currency collapse comes, gold won't do you any good. You need to buy goods in proportion to their weighted use in the CPI consumption basket. That way when we inevitably go back to a barter, you'll have all the goods you need to solve the double-coincidence problem because you'll have everything everybody wants!!!!

Seems like this would be easy to steal. Isn't the entire economy of World of Warcraft based on beating people up and stealing their gold?

Well, actually no. Not sure if you've ever played WoW, but Player vs Player combat does not yield personal exchanges of gold. In the economy of WoW, players can either mine minerals, "farm" other resources (pelts, reagents, etc.), complete quests for gold rewards, combine minerals and resources to create goods to sell to other players and non-player character merchants, and even help other players for direct trade. Even the class of Rogue can not pickpocket other player's gold from them (only non-player characters).

While the WoW economy has been studied for the parallels between real and virtual economies, your comparison falls short and doesn't offer a valid argument against the portability of gold. After all, I don't believe anyone would be waving a sign saying "hey I'm carrying a huge stash of valuable gold". But, rest assured, if they did make it to their destination without the items being confiscated or otherwise stolen, they would be able to trade it for local fiat to buy goods and services in the local economy.

What really bothers me about this gold trade is the severe environmental destruction that accompanies the 'mining' of it. It's pure devastation. Hey, why don't you go and visit a children's hospice in Peru and see the results of your fascination with gold. And for what? End of the world as we know it? You or your loved ones will probably die of cancer before you can cart your gold coins around scrumming for food.

Noah, what kind of reply was that? It's not even a thought, it's just sneer. I'm no fan of gold, but with Europe, Japan and the US monetizing deficits, I'm no fan of the global economy, either. Seems like the guy might have a point. If he's telling the truth and he did jump into gold at 900, he might just know something.

"The S&P has beaten gold over every 30-year period of history, ever. Why 30 years? Well, it's a standard "long-term" investment horizon. But the same is true for 40 years, 50 years, etc."

Then, later:

"Note how there's a common theme here: Past performance is no guarantee of future results. According to "efficient" markets theory, past performance is unrelated to future results. According to behavioral finance research, future results will actually tend to reverse past performance, possibly because so many silly people exhibit herd behavior and jump on bandwagons."

If I had any money at all to invest, I'd make darn sure I had it in an investment I could hold to keep it from being Corzined or "vaporized" away. To me, that means gold, silver, or cash.

Once you realize that the AK-47 is the ultimate endpoint of hand-held firearm technology (rugged, simple, powerful, and already ubiquitous), you realize that demand for its ammo will depend only on sentiment about political stability. If you want to make a bet on fear of instability, buy AK-47 ammo.

Of course, AK-47 ammo can be manufactured, and production can be ramped up in the longer term, so this is only for short-term speculation.

Of course, AK-47 ammo, when paired with an AK-47, also has the advantage of guarding itself, unlike personal gold stockpiles that must be guarded with AK-47s or some inferior substitute.

"the only reason goldbugs wouldn't have already been able to push gold to its optimal price would be if goldbugs were liquidity constrained."

Not necessarily. When you hear [at least some] goldbugs talk about how gold should be at n-thousands of dollars, and how we should go back to the gold standard, etc., you can see that they don't really believe that gold is worth that much. Not in the sense that they would be willing to actually pay that much to own gold. What they want is for the gold standard to come back at some inflated peg so that someone else will have to pay them a lot more for the gold they already have. It's not a normal investment; it's a bet with an unlikely payoff. There's no payoff if normal market forces make the price of gold go up. You're missing a psychological component of goldbuggery. Goldbugs buy gold for the same reason people listen to Harold Camping.

If you grant that gold will reasonably hold its real value over any length of time, its price movement should be comparable to a very-long-duration zero coupon TIPS. In that sense, gold is simply a bet that real interest rates are going to fall. At this point, it's pretty hard to see real rates falling any more than they already are, unless the Fed either raises its inflation target or chaos around the debt ceiling / CR fight drives people into Treasuries.

Could it be counted as real rates "falling", if inflation, target or not, continued to increase while interest rates remain suppressed near zero. After all, 3% inflation this year, is more inflation than 3% last year was.

At the rate debt is being created, rates need to be contained otherwise interest payments will out pace other areas of governmental spending.

Thank you for posting this article. It made me sit back and question why I am a "gold bug" (who also reads zero-hedge incidentally).

First off, I'm not a gold bug that believes "the apocalypse is nigh". I do however, have a preference for ownership of "real" things. Something I can physically hold in my hand. It could be argued, that I can hold a stock or a bond in my hand, I would like to consider what these things are. A bond, is a PROMISE, from some organization, printed on paper, that at some point in the future from the time of issue, I can redeem the paper for the price of the bond plus the interest promised in the currency the bond was issued. Bonds are typically considered equivalent to cash by financial institutions, though the convertibility into foreign currencies is in question and will certainly only be limited to foreign banking institutions.A stock, is a PROMISE, from some organization, printed on paper and converted into electronic format for trading, that at some point in the future from the time of purchase, someone will trade their electronic format currency (and only the currency the stock was issued in) through a designated exchange (for a fee), for my stock.So, while I do "own" these things, and likewise, could potentially "hold" them in my hand, they are but mere representations of PROMISES. Promises that the organization that issued them will not fail. That the organizations that exchange them will not default. That someone will want to buy them. That the currency they are issued in will always be a viable medium of exchange. These problems are typically considered "counter party risk". Yes, I do understand that gold has similar constraints, however I consider it to be less limited by the constraints imposed by the financial engineers of the products such as stocks or bonds. There is no single exchange in which I can trade my gold. There are more institutions that are interested in acquiring it than just financial institutions. Gold is convertible into every currency. Not only that, it exchanges at the same rate in every currency. For example, if I went to the hypothetical land of Lalalu, and the exchange rate for a Lalalu dollars to US Dollars, is 2 to 1 (2 Lalalu dollars = 1 US dollar) and the price of gold is 1600 US dollars, in Lalalu, I will get 3200 Lalalu dollars. This aspect of golds exchange works for all currencies in all countries and makes gold a defacto universal currency.

Continuation:So, in a sense, I believe I'm saving in a currency that is good anywhere, with a small fee paid upfront to the dealer from which I receive my precious metal from. I find this form of saving superior to saving in cash because, while I loose at the front end of the deal, cash is a non-stop loss over time. Anyone who does not understand how floating currency indexes work would not understand that they are not a reliable method for deriving purchasing power of currencies. What must be observed is the effect of inflation, and while the metrics used to measure inflation by modern governments are as slippery as floating currency indexes, there is no doubt that prices continue to rise over the long run. These inflationary effects effect the price gold like it effects the price of groceries. Does it keep in lockstep with inflation, no I don't think so. Consider that someone who saved a Twenty dollar note in 1913 and an almost equivalent value of gold, one troy ounce, then fast forward to today. Who has preserved more of their wealth? The answer should be fairly obvious.So then, another consideration, why do people save? Well, for me, it is for the purpose of investing later on. Whether it be to buy a business or have the capital to start one. Put a down payment on a home or buy one outright when their prices are less inflated by unscrupulous lending. To buy bonds that aren't paying negative interest rates or stocks that aren't being supported by massive monetary injections by the central bank. Or perhaps when stocks are more regulated against High Frequency Traders skimming in the microseconds of stock transactions. As for who would make the greater gains from stocks or gold... I guess we could go back to the early 1900's, when the dollar was convertible directly to gold. At that time, if the stocks went up, stockholders made more gold... Now, if stocks go up, prices have to outpace the price of gold in order to maintain the same potential gain in a real asset. Which is not the case. If you price markets in gold, they have been going down for a while now. I admit, the gains of the stock market have been phenomenal in years past, but the indexes are not fixed, they get stocks swapped in and out destroying the consistency of the pricing mechanism depending on if a stock is "good enough" to be included... Where would the indexes be if all the stocks from the time of creation were still there, and losers not cherry picked out? A question I cannot answer, but ultimately doesn't matter to me. It's just an example of another illusion propagated by the financial community. Again, I'm not a speculator, I'm just trying to buy a real asset that I can pass to my kids and they can pass to their kids and so on.Oh, and it's invisible to the IRS and other agencies that may feel entitled to part of my hard earned savings.

I read a lot of economic history and inevitably governments will tap out their credit and will resort to debasing currency to finance their power. Pharaohs, Monarchs, Dictators and now Fed officials. Gold was irrelevant when the US debt to GDP ratio was lower.

Awesome charts and regression analysis. I hadn't seen these. In the final chart, going back to 1987, you might argue that the large-scale monetization of debt, starting around 2009, represents a distinctly different model. Annually printing a trillion dollars a year and handing it to the Federal government isn't like anything we've done in the last 50 years. Why people are complacent about this is beyond me.

We are still working out what the consequences of this historically unprecedented behaviour will be....but since it is unprecedented, why on earth do people think that a traditional hedge like gold would necessarily be a defence against whatever might go wrong - which we don't know yet?

QuoteNumber 2 really fails to understand a basic idea about financial markets. If it's obvious that central bank money-printing will drive up the value of gold, why isn't that fact already incorporated into gold prices? close quote

Uh, are you telling me, based on the past few years, that markets are good predictors ??????If so, I've got a bridge in brooklyn to sell you...

I think your analysis is a little over the top; these guys are nothing but sales guys, hustling for a buck - as you sagely point out in the latter part of your post, altho why we need yet another takedown of snake oil econ sales pitchs is beyond me; wouldn't it have been easier to just link to one of the hundreds of similar already published articles on the same vein ?

I mean, you are smart, and a good writer, but there must be dozens and dozens of articles that make a similar point - people selling gold are just sales guys

Noah: I am a confessed Zero Hedge reader so caveat emptor. It's weak of you to attack a blog that is committed to providing some truth to the investing public in a world of controlled media and controlled politicians.

gold should be a “barbarous relic” but it’s not -- its insurance against bad government. How are you feeling about the quality of global government? I know our’s is bought and paid for the Europeans is bought but probably not paid for.

gold exists as a store of value which is what one of the four or five requirements of money.

Here's something to think about: (Credit to Martin Armstrong) as the Federal Reserve quantitatively eases -- you see $2 - $3 trillion of new money creation -- what you don't see is that all debt -- as it approaches 0% interest rate is in fact converted to currency. The Fed has actually monetized $16 billion-ish on top of the $2 - $3 created out of thin air…that may come as news to the markets but hey -- maybe its priced in.

Your belief by the way that gold has beaten S&P over any 30 year period is odd as the history of stocks is values are measured in dollars but the history of gold is fixed in dollar price...for all but the last 42 years...and in those 42 years gold appreciated 4,757%...not bad. In that same time period S&P 500 is up 1,395%.

In truth i would like to not believe in gold. in fact i can't do that -- it would be dangerous and irresponsible.

Thank you for continuing the conversation but please refrain from the zero hedge bashing.

And therein lies the entire problem with this post. Noah's position seems to be that monetizing debt to the tune of a trillion dollars a year with no end in sight* has not been a problem yet and won't be and the gold bugs position is that it has not been a problem yet, but will be. Are there any historical examples that support Noah's position?

* - Unless one of two things happen: either we stop running trillion dollar deficits or we find a trillion dollars a year worth of demand for US Treasuries. President Obama is firmly against the first and the Chinese and Japanese show no appetite for the second.

It's weak of you to attack a blog that is committed to providing some truth to the investing public in a world of controlled media and controlled politicians.

I don't think they're really committed to that. I think they're handing you a fat sack of bullshit. What, because I say I'm committed to something, that must mean I really am? Well hell, in that case, I'm committed to truth, justice, and the American way, not to mention magical ponies that ride on rainbows!

gold should be a “barbarous relic” but it’s not -- its insurance against bad government.

Well first off, suppose that's true...to buy more gold you have to believe that that insurance is currently underpriced by the market.

Also, I think that it's probably not true, gold is probably not insurance against bad government.

Your belief by the way that gold has beaten S&P over any 30 year period is odd as the history of stocks is values are measured in dollars but the history of gold is fixed in dollar price

What Does That Even Mean???

The dollar price of the S&P is directly comparable to the dollar price of gold. If you like we could price each one in barrels of oil, boxes of AK-47 ammunition, euros, constant year-2000 dollars, or in ounces of gold, and the result would be the same.

Over any 30-year period, one share in an index fund representing the S&P 500 could be exchanged for more ounces of gold at the end of the period than at the beginning of the period. How's that?

And therein lies the entire problem with this post. Noah's position seems to be that monetizing debt to the tune of a trillion dollars a year with no end in sight* has not been a problem yet and won't be and the gold bugs position is that it has not been a problem yet, but will be

Nope, that's not my position at all.

My position is that if this is indeed going to be a problem, there's no reason to believe that the problem isn't already incorporated into the gold price.

Monetizing the debt would be priced in only if people all became attracted to gold as an investment at the same point in the monetization process, which makes no sense. One would think that as it goes on, more people will become concerned about it, driving up demand for hard assets. Or perhaps there would be some related event which would trigger interest in gold from people otherwise complacent with massive printing of money.

Monetizing the debt would be priced in only if people all became attracted to gold as an investment at the same point in the monetization process, which makes no sense.

That is not right. Only a small subset of investors need to be attracted to gold in order to push it to the correct price. Reason: In the absence of short-sellers (which there aren't very many of for gold), the market price is determined by the person who is willing to pay the highest price. Think about that.

The people who are interested in buying gold change over time as a function of external events such as increased concern over monetization of the debt. That is, while Harry Schwartz may be the high bidder right now and willing to pay $1600, after a fiscal spasm in Europe or Japan, you may get Willy Jones in as a completely new buyer where he is willing to pay $1700. The effects of monetization have not been priced in because they haven't all happened yet and all the eventual buyers aren't in the pool yet.

Second, this one is too dismissive: "Zero Hedge and the whole "goldbugosphere" tries to push the idea that they understand macroeconomics better than everyone else out there"

There are indeed people who are contrarians who understand the world better than the rest of us. Those are the people who cleaned up during the recent crash because they saw something coming the rest of us didn't see at all.

Again, I'd love to hear examples of countries who have monetized debt the way we are for the length of time we have (and will continue for the foreseeable future) and didn't have some kind of major correction. To me, you must be anticipating a reduction in the deficit or increased demand for Treasuries.

I agree with much of the concerns expressed on Zero Hedge, but I prefer rental property to gold.

...Also, if it's possible to predict that new, more bullish investors will enter the pool, why haven't the people who are currently in the pool anticipated the entry of the new people, and bid up the price accordingly?

"That is not right. Only a small subset of investors need to be attracted to gold in order to push it to the correct price. Reason: In the absence of short-sellers (which there aren't very many of for gold), the market price is determined by the person who is willing to pay the highest price. Think about that."---------Actually, that's not right... There is actually a huge short position against gold.http://www.cftc.gov/oce/web/gold.htm

This is one of the more conspiratorial aspects of the precious metals market. The massive amounts of unbacked short positions allegedly taken out by financial institutions to "hedge" (suppress the price of gold?).

the market price is determined by the person who is willing to pay the highest price. Think about that.

This is a general proposition for financial assets. Suppose only twenty percent of investors own shares in, say, GE. That would mean that 80% of investors think GE is over priced. For most investments, most of the time, most investors think the investment is overpriced (and we know this because at any given time only a minority of investors are invested in any given asset).

China is easy. To pursue a mercantilist policy they need to buy foreign assets to balance their current account surplus. When they buy American Treasuries they get accused of currency manipulation so they have moved on to buying copper stockpiles, gold and Canadian oil companies to hold down the Chinese currency. The right wing loonies cannot accuse China of currency manipulation for buying gold from South Africa or Russia or Australia - even though that is what is going on.

if you go ahead and read the budget report from the white house prepared by the office of budget and management you will see that the US Government has projected roughly $1 trillion per year for as far as the eye can see. Maybe that wont be a problem. Also -- that's predicated on 5% - 6% nominal GDP growth per year. good luck to all of us. Apparently Ray Dalio wears the tin foil hat as well.

OK, here is my issue. Just comparing the USD price of gold to the S&P is a very US-centric and limited view of the world. For example, the Yen price of gold is hitting new highs. Try these statements on for size:

The Deutsche Mark price of gold has outperformed the US stock market since its inception. They Yen price of gold has done the same. Ditto for the French Franc. All of these currencies have suffered massive devaluations in the early part of the 20th century.

Or said another way:

The USD price of gold has outperformed the following stock markets which at some time during the 20th century each went essentially to zero in local currency terms: Argentina, Russia, Germany, Japan, China, and Egypt.

The point is-- history is discontinuous. Just because the USA has enjoyed a long period of relative stability does not mean it will continue to do so. In fact, as Minsky pointed out, the fact that it has been stable has led to an accumulation of massive imbalances in the financial and political systems which have led to a fiat currency over encumbered by liabilities and insufficiently backed by assets and income generating power.

And yes throughout history, those types of situations have been resolved in the favor of massive devaluation in currency.

Most people are far too US-centric in their view of history. Which is odd given how uncool that normally is seen among the academic crowd.

The USD price of gold has outperformed the following stock markets which at some time during the 20th century each went essentially to zero in local currency terms: Argentina, Russia, Germany, Japan, China, and Egypt.

The desire to own gold is a fetish. Humans are at the basic level emotional creatures, and owning such a hard asset is comforting to many. But as a serious investment, how does one value it? It does not generate cash flow, and like the dot come stocks that had no earnings, the price is driven by speculation.

I always liked Warren Buffet's remark: "You can hold an ounce of gold for an eternity and you will still have an ounce of gold. You can fondle it, but it won't respond."

Of course, what WB knows but doesn't say, is that is precisely the key benefit of gold-- you can hold an ounce for eternity and still have an ounce. What else can you say that about? Certainly not a $100 bill or 1 share of BRK

The "Fondler of Omaha" (that sh-t is trademarked so don't go using it without asking me first) as we tinfoil hat wearing bozos call him -- could hand that ounce of gold over and get himself plenty of fondling.

Gold is an emotional metal -- it cannot be valued on an absolute basis you get a circular reference -- how many inches is a 12" ruler in inches...see the problem?

Gold is worth what someone else will give you for it. All markets do is simplfy the transactions. Even the Fondler would agree with that.

However it's instructive perhaps to look at how much it costs to find, mine and refine an ounce -- and there the answer is about $1,200 to $1,350/oz.

Lastly, the thing about gold bugs is they want you to join them or to explain to them why they are wrong -- as for the fiat currency -- that is a process of obfuscation and power.

Yes, paper money allows many things positive to happen and I wont list them all here but Governments with unfettered access to capital are a hazzard to us all.

Your post implies that diversification is just common sense ("you shouldn't need Zero Hedge articles to tell you to diversify your portfolio!")

Then why don't central banks follow your advice? Surely they're run by smart guys. Germany has almost 74% of its forex reserves in gold. Why don't they diversify it?

If fact, the US has far more gold than any other country, AND it doesn't even have to worry about forex reserves b/c of the dollar. So why doesn't the Fed just sell off all of its gold? Why keep so much in one asset class instead of diversifying?

This is a good question, and I don't know the answer...But remember, a central bank doesn't really care about buying high-yield things, or investing in stable stores of value (the Fed also holds a lot of mortgage-backed CDOs!). The Fed cannot go bankrupt. Its goal is not to grow its wealth.

It is definitely interesting to ask why central banks are doing what they are doing, but remember, you should not try to act like a central bank!

Central banks (and certainly other public holders of gold) are subject to political constraints. Selling off their massive gold holdings would drive down the price of gold and be extremely politically unpopular. It's as simple as that.

Not even the Bank of China? You mean they wouldn't care if the value of their Treasury holdings fell due to high (not necessarily hyper) inflation?

IF (a big if) the dollar starts to lose value and central banks (particularly in dev countries) need another place to park their forex reserves, where are they going to go? The euro? (Prob not now). Yuan? Not ready. So... wouldn't it be gold?

My point is not whether gold is a good investment. It's that gold still plays an important (if poorly understood) role in the int'l monetary system. To dismiss it with the ol' "barbarous relic" trope seems a tad premature.

Could the int'l monetary system function w/o any gold on central bank balance sheets?

Given that central banks' reasons for doing things are usually more to do with influencing markets than managing their own portfolios, I'd guess that central banks might be propping up the gold price. We can have an interesting discussion about why they might be doing that, or you can read FTAlphaville on the subject:

In China's case, its population tend to save in gold and it has historically encouraged this. The Chinese government therefore has a vested interest in ensuring the gold price does not fall. Please don't tell me the PBOC is independent.

Considering that China's govt is already stealing lots of wealth from savers via financial repression, it doesn't seem that they would really care about propping up the value of private gold holdings (which I would imagine must be lower than total bank deposits). So this explanation doesn't seem convincing.

"central banks might be propping up the gold price"

Central bankers are quite cozy with one another, so an int'l conspiracy isn't completely out of the question. But "propping up the gold price" seems to imply that (1) the true mkt value is less than it is now, (2) central banks know this (since they are the cause?!), and (3) they are voluntarily restraining themselves from abandoning ship first. This is quite a lot to digest--what evidence exists for this?

So if it's not the PBOC's concern for Chinese gold savers, and not an int'l conspiracy, how do we explain the recent large increases in central bank gold holdings?

I don't know the answer either; but perhaps as I said, central banks realize that there's a nonzero probability that the value of dollar-denominated assets might drop significantly, and gold seems like the next best option, given the shaky status of the euro. This would make them "goldbug" investors/hedgers, no?

Number 2 really fails to understand a basic idea about financial markets. If it's obvious that central bank money-printing will drive up the value of gold, why isn't that fact already incorporated into gold prices?

This reminds me of the old economics joke about a $20 bill lying on the ground...the two guys walk by and one says to the Economist "hey there is a $20 bill lying there", and the Economist replys "no, it cannot be because someone else would have already picked it up".

After the last 10-15 years it should be self-evident that the idea that markets "price it all in" well before the fundamentals is nonsense. The "Greatest Trade Ever" guys made their money basically on the fact that the markets did not price in what was plainly self-evident to any thinking person which is that the debt based on overinflated housing prices were basically complete junk.

So the idea that the CURRENT price of gold ALREADY prices in some amount X of Central Bank monetization is kind of just an unfounded assertion.

Outright lies. Give me a single proof that s&p beat gold for 30 years.

One must be a total retard to believe that. While i dslike zero hedge, this is not the way to disagree. Infact i think ur goal is to become famous by critisizing a famous blogger and u hve been successful.

But remember there always are smart investors who can differentiate noise from signals. And your post sir, is all noise.

To see the general idea, first start with price data. Here's a log-log chart of s&p prices vs. gold:http://www.businessinsider.com/sp-500-priced-in-gold-since-1886-2013-1

Any time the yellow line ends up lower over a 30-year interval, gold appreciated by more than the S&P.

BUT, this is only price, and the S&P also pays dividends. Until 1995 the S&P's annual dividend yield was at or above 3%:http://static.seekingalpha.com/uploads/2007/9/4/rates1.jpg

That means that from 1950 to 1980, when the price of the S&P declined slightly in gold terms, the S&P actually had a better return, because you have to add ~3% to its annual return each year to account for dividends.

This talk of comparing gold since 1886 is frankly bizarre. Hello, the price of gold was fixed until Nixon severed the link in 1971. Looking at the price of gold in dollars before then is idiotic. Of course something that is fixed by government decree isn't going to appreciate measured in the units it is fixed in.

The important comparison is that gold outperformed the S&P 500 from 1971-1980, then underperformed from 1980-2001, and has outperformed from 2001-present. An intelligent analysis would separate out those 3 periods by how they are different in terms of overall macro, the interest rate regime in place, and then make some assumptions about which time period 2013-2020 is going to look like. I don't have a crystal ball so I own both stocks and gold but my bet would continue to be outperformance of gold until real interest rates turn positive and the government debt bubble bursts. Both of those will happen but not for some years yet.

"The important comparison is that gold outperformed the S&P 500 from 1971-1980, then underperformed from 1980-2001, and has outperformed from 2001-present."

Ding! I think this comment wins the thread. Matches quite well to: End Bretton Woods to Volcker, Great Moderation to Dotcom Bust, DC bust to now. Certainly seems a more appropriate way of looking at it than "cherry picking" the last two years (Noah's critique #1).

The 30-year investment window criterion doesn't really address the gold boosters' argument b/c, in their view, the game changed after 1971.

The key variable is real interest rates (Treasury minus inflation). That is why gold did poorly in the 80s and 90s relative to the 2000-2010 despite CPI being higher in that decade. Most people mistakenly believe gold is directly tied to inflation it isn't. If inflation is 7% and you can buy T-bills at 10%, gold isn't going to go up. But if inflation is 3-4% and T-bills are 0% then gold will go up. For all the various points and counterpoints most of which are complete bullshit, a bet being long gold here is a bet that Bernanke will hold steadfast to ZIRP regardless if CPI starts accelerating. Volcker decided to kill inflation, and raised rates well above inflation to produce positive real rates. Now that sent the economy into a deep recession. IMO, Bernanke is no Volcker but we will see. They've told us ZIRP until unemployment goes to 6%. I"ll take him at his word. Everytime I question the long-term structural gold bull, I simply go back and read Bernanke's 2002 speech.

remember there always are smart investors who can differentiate noise from signals

as Charlie Munger has pointed out, there are about 20 to 25 people in America who make a living handicapping horses, but he doubts that have time to read or comment on blogs or much of anything else

There is no such thing as investing in gold. While the line between investing and a casino is not easily drawn, in the case of gold, it is not even close.

If gold or other commodities (oil, wheat, etc.) were investments, as they word is properly understood, then SWAirlines would not be hedging its purchases of jet fuel.

If one deducted from gold the costs of holding and hedging most all the claimed returns disappear, lost through commissions paid on each hedge.

To understand this, one need look no further than bank lending, which is surely less risky than buying gold, where it has been consistently shown that, to eliminate risk through hedging, all "profits" disappear in the commissions paid on hedging transactions.

Plus, all of these 'gold nuts' talk about how the government will steal your gold, yet they continue to sell gold to the public! LOL

If gold was so valuable, why isn't the US selling paper and buying all the gold in the world? Because it would not help the economy at ALL.

It's a relic. I love how people say "yes but back in the day" - I can also say that if we charted the number of horses used in the economy vs GDP, we would see a massive drop over the last 100 years. Conclusion, since horses were always used for economic purposes, this means the economy has declined over the last 100 years!

We cannot compare current economies with the past, it simply does not work like that

Oh you mean like all the sell-side anaylsis that were almost 95% aggregated wrong on their calls for the S&P and other asset classes. I don't look to Zero Hedge for their calls or articles on gold I feel comfortable knowing that they are there with profound insight into what is happening in the real world as far as the banking system and their work on HFT was extremely extensive and accurate. They have been the first to call on many different events including the trade of local and non-local Greek bonds before the PSI, even JPM posted in one of their client notes to pay attention to ZH due to some of their updates. No doubt they post a lot on gold and they try to push the trade because that is thier belief: that the fiat system will eventually collaspe due to its own weight and gold will be restored. The CB becoming net buyers, Germany demanding its gold back and the PIIGS forfeiting their gold to the Germans does bode well for their point, although I don't own gold as an asset class at all either. If you look at your chart, just like you made the point earlier, of the S&P for the past 10 years where has it gone? Where is all the volume and conviction? Even with bond funds yielding next to nothing, retail continues to pour into those funds as they surge. I'm not so sure that zero hedge is always right but some of their reporting is so well written and out of the main stream spin that it is by far worth reading and if you don't like what they report on gold holdings, like China's increasing gold holdings m/m, then don't read it. At least you know where they stand, and all other reporting is just to show how much of a recovery we really aren't in. I would say that overall, they are one of the top sites to get the most unbiased news from. You don't like them, don't read them. There were plenty of opportunities to make money on ZH suggestions, and I can tell you from experience much more accurate than a firm like Goldman Sachs calls.

I'm disappointed in how weak Noah's post is. There are many serious problems with it. Nowhere in that blog post did it instruct to put on an GLD/SPY pair trade. It suggested to put on a GLD/USD trade on which could have been profitable depending on your timing. I could just as easily critique it for not suggesting to put on an GLD + SPY- USD trade on.This is all irrelevant because S@P was never even mentioned by ZH, and the S@P is certainly not the default measure of returns unless you are tuned to the financial cartoon network. Why not use Long-term Mexican bonds as the opportunity cost?

Quote "The S&P has beaten gold over every 30-year period of history, ever."And how many non-overlapping sample spaces do you have - 4 ? LOL, American-centrism, history goes a lot farther back. Many countries have had their currencies incinerated in the 20th century. The whole purpose of gold is not to serve as a vessel for retirement, but as a safety net in case of an inflation disaster.Also, if you held gold in the futures market during that time period, you would also receive interest on the collateral.

Quote "If it's obvious that central bank money-printing will drive up the value of gold, why isn't that fact already incorporated into gold prices?"You could apply your same logic to the S&P as well, so nobody should ever predict higher stock markets because everything is already priced in. Everyone must be completely silent, shaking in fear at the thought of disagreeing with Mr. Market.

Quote "goldbugs were liquidity constrained"Oh the horrors of not having infinite command of dollars. I'm soo embarrassed. Seriously, people are money constrained. Unless your view is that the government pushes prices to the correct levels because it has infinite amounts of other people's money, then I do not understand how you even view market valuations.

My portfolio is about 4% gold and silver and 75% stocks FYI.The gold portion of my portfolio is taking the place of long-term bonds of my default allocation. I would recommend people to be overweight both stocks and metals.

Do you believe that your sample of 4 is convincing evidence of the superiority of the SPX over gold?

I do not consider the 1980's to be an inflation disaster, and there are more variables at play with regards to pricing gold. They include real central bank gold sales, replacement costs of inventories, real interest rates on substitute investments, expectations, etc.

Quote "Funny how goldbugs always compare gold to cash. That's kind of lowering the bar, seeing as nothing should have a lower expected return than cash."

Funny. According to your economic theory, gold, long-term treasuries, the S@P, and money-market cash all have the same expected return.

Lets be honest, your first post has nothing to do with the return of gold over the past year, you have a bias against goldbugs. If gold massively outperformed the SPX, you would not have written a post praising the intelligence of Zero Hedge.

Under the Basel 3 Accord (which has recently been circumvented by the Federal Reserve, for the time being...) Gold will be raised to a tier one bank reserve asset, considered equivalent to cash and bonds. Currently it's a tier 3 asset, meaning only 50% of it's value counts. As a tier 1, 100% will count.

If you were a bank, you would not want to place funds in a negative yielding asset, especially when rates start going up.

Remember, it costs money to hold gold and it does not yield any income.

While I agree, the banks were stupid for taking excessive risks, there are many solid banks that are making smart decisions (regionals, smaller local banks etc..)

Do not expect banks to sell off income producing assets for negative returns of gold. Shareholders would dump bank shares massively since their job is not to be a gold etf and lose money every quarter.

Why do they need to own any gold when they can just get eyeballs? Glenn Beck made 30 million a year off scared old White people, zero hedge makes probably a low seven figure of scared white people on the internet. And now that they've diversified into antisemitism and truther-ism the real money is probably rolling in. Which is actually too bad, in 2009 when there was a horde of recently unemployed bank employees who thought the world was ending and there was no risk to sharing insider info zero hedge had some pretty insightful pieces.

Gold had a good run but with the Fed near the end of asset purchases, 2013 looks like the final year.

Don't forget, the market is a forward looking mechanism. By the middle-end of 2013, we'll be hearing about either the end of asset purchases and when the Fed will start raising rates in 2014-2015, this will be the top in gold

Looking at every chart that has gone exponential like gold, nat gas etc.. the pullback needs to get back to where it began. So while gold does have some value, it will pullback to around $400. At that point one might consider buying it yet again

To the Anonymi who are asking why central banks are so invested in gold.

The reason is that it allows them something to sell off in the case of a speculative attack, which many central banks especially in Asia are paranoid about, without being accused of currency manipulation.

As someone who reads ZH and is a 'Goldbug,' allow me to respond to your remarks in a comprehensive manner (2 Parts):

"Number 1, of course, is just counter-cherry-picking. The S&P has beaten gold over every 30-year period of history, ever. Why 30 years? Well, it's a standard "long-term" investment horizon. But the same is true for 40 years, 50 years, etc."

This goes together with point 4 about portfolio diversification, so I'll lump them together. This sort of investment 'analysis' makes no sense, because historically no single asset class can claim to have outperformed every other class during every single possible period of time. You really can't make the argument that a broad asset class like equities is any better or worse than another broad asset class like cash, because they are held by investors for different reasons. You go one step further though and compare a subset of equities (S&P 500) to a subset of cash(gold). Why not compare the FTSE 500 to the Japanese Yen?

In creating a multi asset class portfolio, you have to be cognizant of the environment in which you're investing with respect to asset weighting as well as the specifics within each asset. After you've purchased the best equities, bonds, commodities, etc to satisfy your risk appetite, whatever is left is 'dry powder' until the next opportunity comes along. Until that time comes, you need to store the value of that dry powder. In different time periods, different monetary assets have been better at that task. Just between the USD and gold, in the 80s and 90s, the USD was a better place to store value. In the 70s, and since 2000, gold was/is a better place to store value. A quick rule of thumb is that real interest rates being below 2% favours gold appreciation, while real rates above that do not. The 70s were a period of firmly negative real interest rates, the 80s were a period of real interest rates firmly above 3-4%. Since the early 2000s, real interest rates have mostly been negative, with the major corrections in the gold bull market coming when the real interest rate spiked (briefly) above 2% in 2006-early 2007, and in 2008. This is the intelligent way to look at and understand gold, and it's really quite simple.

"Number 2 really fails to understand a basic idea about financial markets. If it's obvious that worthlessinternetstock.com's lack of revenue (let alone profits) will drive down the value of it's stock, why isn't that fact already incorporated into its price? In other words, the only worthlessinternetstock.com actions that should make its price fall are surprise actions - like even less revenue than people thought."

Just edited it to go back in time.

"Now, Zero Hedge and the whole "goldbugosphere" tries to push the idea that they understand macroeconomics better than everyone else out there - that what is "obvious" to them is not obvious to most of the world, which is still in thrall to (Keynesians, neoclassical econ, Xenu, take your pick)."

Sure, 'gold bugs' may have a certain attitude, but that isn't true of all of them (there are plenty of intelligent ones who can articulate their views quite well). No matter how bright one is though, showing sympathy to any sort of goldbug/Austrian/whatever argument is enough to have you insta-branded as a crank, idiot, foolish, no matter how well your arguments are constructed. That's intellectually lazy of course, but it's easy to do given that those views are the minority view. Faced with that, of course you're going to find adherents being overly defensive and prickly when they address their opponents. Again that doesn't apply to everyone.

But look at your response even. The constant use of the pejorative 'goldbug' is itself a HURR DURR argument, yet simultaneously you paint all gold arguments as some sort of hurr durr thing.

This sort of investment 'analysis' makes no sense, because historically no single asset class can claim to have outperformed every other class during every single possible period of time.You really can't make the argument that a broad asset class like equities is any better or worse than another broad asset class like cash, because they are held by investors for different reasons.

Of course. It's just an exercise to illustrate what a poor tipster Zero Hedge is (not that I'd advise listening to any tipster).

You go one step further though and compare a subset of equities (S&P 500) to a subset of cash(gold).

Is gold cash? It's liquid, yes, but is there any country where it is accepted as a medium of exchange?

Well, according to any "separation theorem", this is not at all what you do. You choose your risky portfolio to maximize Sharpe ratio, not to satisfy your risk preferences. Then you mix this portfolio with risk-free assets to satisfy your risk preferences.

whatever is left is 'dry powder' until the next opportunity comes along. Until that time comes, you need to store the value of that dry powder.

"Dry powder"? Sounds like a poorly defined concept that sounds sort of smarty but is actually a terrible (and vague) investing principle...but maybe I'm wrong, and you just haven't managed to explain this "dry powder" thing...

Just between the USD and gold, in the 80s and 90s, the USD was a better place to store value. In the 70s, and since 2000, gold was/is a better place to store value.

Yeah but could you have foreseen those regime changes ahead of time?

A quick rule of thumb is that real interest rates being below 2% favours gold appreciation, while real rates above that do not. The 70s were a period of firmly negative real interest rates, the 80s were a period of real interest rates firmly above 3-4%. Since the early 2000s, real interest rates have mostly been negative, with the major corrections in the gold bull market coming when the real interest rate spiked (briefly) above 2% in 2006-early 2007, and in 2008. This is the intelligent way to look at and understand gold, and it's really quite simple.

Looks smart at first glance...but interest rates vary from country to country, while gold's price is determined on a single global market...

What if U.S. Treasuries stop being a "safe haven"? Seems like this rule will easily break down. And there are other contingencies in which this rule will break down as well.

"Number 2 really fails to understand a basic idea about financial markets. If it's obvious that worthlessinternetstock.com's lack of revenue (let alone profits) will drive down the value of it's stock, why isn't that fact already incorporated into its price? In other words, the only worthlessinternetstock.com actions that should make its price fall are surprise actions - like even less revenue than people thought."

Just edited it to go back in time.

The significance of this is not completely clear, but you appear to be defending Zero Hedge's prowess as a tipster, implying that reading that website will allow one to see the obvious truths that the market misses, and hence reap huge profits...

...i.e., playing to the overconfidence of poor hapless young men...

But look at your response even. The constant use of the pejorative 'goldbug' is itself a HURR DURR argument

It's a descriptive, not a perjorative. You added the negative connotation, I just wanted a way to describe a group of people who share a similar investment philosophy.

Part 2"As for Number 3, note how it exploits a fairly well-known behavioral bias: Envy. When the gold flogger proudly boasts that "I made a fortune in gold!", people feel like unless they do the same, they aren't as smart as the guy making the boast. There's a knee-jerk psychological reaction of "If you can do it, well by golly, I can too!"

But notice how crazy this is. Even if you're as smart as the goldbug, it doesn't mean that you can replicate his success just by buying the same thing he bought. In fact, chances are you can't. Chances are, the huge gains that gold has seen over the past decade were a one-off event, not to repeated anytime soon."

I don't know what people you talk to, but when I hear someone say they made a fortune in something, my knee jerk reaction is not to buy that thing, but to understand the persons thought process in coming to the conclusion to do what he or she did. WRT gold specifically, of course that response is valid to someone who calls you an idiot for buying gold, not to breed envy, but to prove that you were right in your analysis of the situation. As for the chances that those huge gains were a one-off event, well you should be asking whether it's a two-off event given the 70's, and as for the future, see what I wrote above about how to analyse gold.

The rest of your post, is perhaps the most baffling because you attempt to paint ZH as some sort of scam artist preying on the weak. I agree that copying other people isn't prudent in investing, and that the herd gets killed. But ZH isn't the herd, gold isn't the herd investment. Not when gold represents roughly 1% of global financial assets. You should be directing your attention at the litany of sell side analysts who come on financial tv and other financial websites touting whatever it is they're holding, in the hopes that retail jumps in.

Playing to your masculinity? Really? Traders/investors who go bust do so because of their inability to INTERNALLY control their greed and fear impulses. The only thing a site like ZH could possibly influence is the precise asset or security in which they self destruct in. He/she could sit there reading 100 gold stories on ZH and then jump into the futures market going all expecting to make $10 million by next Tuesday. He/she going bust wasn't a function of ZH or gold, but a function of his/her hubris. He/she could have easily gone bust playing the 10 Year, or SPY (which is far more prevalent). The underlying cause is the individual, nothing else.

And if you really want to talk about playing to masculinity (or any of the other 'evils' perpetrated by ZH), what about Business Insider, and their need to play to masculinity by having the feature image of every other post being some hot woman? They too have countless articles speculating on where XYZ financial asset is going, and they aren't beyond using dodgy tactics to attract readers. I'm awaiting a SCAM REVEALED type post about them, but I suspect I'll never see it, simply because their slant (and they do have one) is more appealing to you. Which, ultimately is what this is all about.

I have to admit, BI and other such mainstream financial press lead me into the markets to my financial loss. When I got started, I considered those sources as "experts", but eventually realized they are paid salesmen of financial products such as stocks and other paper assets. They make their money peddling concepts printed on paper or digitized onto a screen. Since my painful learning experience, I'm afraid I'll be sticking to real assets until some rule of law is returned to finance.

I don't know what people you talk to, but when I hear someone say they made a fortune in something, my knee jerk reaction is not to buy that thing

Smart.

ZH isn't the herd, gold isn't the herd investment.

What, you think there's only one herd at any given time???

Playing to your masculinity? Really?

Yes, really.

The underlying cause is the individual, nothing else.

An unsupported statement, and roundly contradicted by empirical and experimental results in behavioral finance...Also, an attempt to turn a factual debate about biases into a moral one about personal responsibility...

what about Business Insider, and their need to play to masculinity by having the feature image of every other post being some hot woman

Hey, looks like lots of people have caught on to the testosterone tactic!

I'm awaiting a SCAM REVEALED type post about them, but I suspect I'll never see it, simply because their slant (and they do have one) is more appealing to you. Which, ultimately is what this is all about.

Less than 1% of people in the West own gold. Yes, to some degree as an investment that is intended to be traded later it is a herd investment inasmuch as that it's a bet that someone will value it later more highly than you. But the real herd bets — that encompass way more than 1% of the people — are things like AAPL or FB, or anything Cramer or Business Insider are going bananas over. To your credit AAPL of course is a topic you've written about (and I agree with your analysis.)

Also, an attempt to turn a factual debate about biases into a moral one about personal responsibility...

It's a bad idea to go crazy with leverage over any asset, whether that is XAU or SPY. Yes, anyone who looks at the last ten years and is like "EHRMAHGERD!!11 GOLD!1111 IMMA BUY IT AND BE RICH LIKE PETER SCHIFF AND JOHN PAULSON!!111"is delusional. They missed the train. Past results are no guide to the future. We all agree on this, which is the quintessence of what you seem to be saying in this post. Yet still some of us — including central bankers, pension funds and hedge funds — think there are still some compelling reasons to acquire and hold gold, quite unsurprisingly given the current low-real rate environment, and uncertainty over the future of the global reserve currency system.

OK, you have to realize that there is a selection effect going on here with what Noah Smith reads.

I actually read Zero Hedge (occasionally) because they say stuff like "the financial industry is dishonest" and "financial numbers are cooked". But they also flog gold. So I come into contact with gold-flogging.

But stock-flogging? If I see an article or link about AAPL, I instantly look away. I don't even read it. Same with any stock tips. I unfollowed Joe Weisenthal because ever other tweet of his was "OMG STOCKS R GOING CRAZY RIGHT NOW", and I know what Brownian frigging Motion looks like.

So you see, what I write about is heavily biased by what I am actually willing to even read in the first place!

Yes, anyone who looks at the last ten years and is like "EHRMAHGERD!!11 GOLD!1111 IMMA BUY IT AND BE RICH LIKE PETER SCHIFF AND JOHN PAULSON!!111"is delusional.

OK, that made me lulz.

Yet still some of us — including central bankers, pension funds and hedge funds — think there are still some compelling reasons to acquire and hold gold, quite unsurprisingly given the current low-real rate environment, and uncertainty over the future of the global reserve currency system.

I think if people-who-are-interested-in-gold (I can't say "goldbugs" because Dismal Operator will call the Political Correctness Police on me) spent a lot of time 1. investigating the risks that gold really hedges against, and 2. rationally explaining this to people, then...well, gold really WOULD go up, because the 99% of people who currently think "gold = crazy" would realize that it's not crazy, and maybe they'd make their portfolios 2% gold, and that demand would be enough to send gold prices soaring.

BUT, as things stand, the rationale and theory for gold seems to be dominated by "Austrian" thinking. And "Austrian" ideas seem to drive away most rational people, and for good reason too.

"And "Austrian" ideas seem to drive away most rational people, and for good reason too."

Noah, what is your take on the Neo-Austrian school loosely based around GMU (Peter Boettke, Steve Horwitz, Larry White, Peter Leeson, Mario Rizzo)? Do you feel they bring anything worthwhile to the table?

"they say stuff like "the financial industry is dishonest" and "financial numbers are cooked""

And they are right about that stuff. Of course it is easy to reach the conclusion that financial markets are dishonest. When they tell you that they have 700 Trillion in derivatives contracts outstanding on an underlying base of about 100 Trillion in securities you know there is something fundamentally dishonest going to.

1.+4.) I think the question is not only which timeframe you cherry-pick for evaluating an asset, but also what your liquidity needs are. If you can wait 5 or 10 years till the stock markets have recovered from a crash, you're fine, but if you're e.g. a pension fund you might have trouble in the meanwhile. This is not a point for gold, just a note that these evaluations over long time horizons alone might not be so sensible... With respect to diversification, think of the Yale or Harvard Endowment Funds, which were diversified over stocks, but then 2008/09 killed them anyways - despite them being much closer to behavioural finance, people knowing what efficient markets are pricing in, etc. Diversification can mean a lot of things.

2.+3.) I'm pursueing a PhD in economics myself (though not in finance - gladly), which means bearing relatively little risk to my lifeplans and earning my money with printed paper. This is probably why I'm not mocking very much the people who make or lose their money by facing market risk everyday, also keeping in mind how much nonsense the best academic economists often talk about the real world. I'm not having the impression that you have a clear picture of how the successful people in the investment world (i.e. those who survive the crashes) think. I can recommend the books by Steven Drobny to get an idea.

I think one of the reasons why the gold price predictions didn't work out is that there has been a fundamental change in the mechanisms of the monetary system. In the past, stating that lowering interest rates and printing money lead to inflation was a pretty good prediction (from economic models). By today we have seen extraordinary actions by central banks to reflate the economy, but now we have this giant financial sector between the central banks and the real economy and we have no clue of what it does with the shitzillion of dollars injected (most academic economists have no clue neither, as a sidenote). I think the last word on what the effects will be is not spoken yet - there is a chance we may muddle through with probably sobering outcomes in terms of growth, but there also remains a chance of a nasty ending. That's why I'm a bit more cautious on "Haha, you were wrong!"...

"Number 2 really fails to understand a basic idea about financial markets. If it's obvious that central bank money-printing will drive up the value of gold, why isn't that fact already incorporated into gold prices? In other words, the only central bank actions that should make gold prices rise are surprise actions - like printing even more money than people thought." - and they will. This blogger should stick to economic theory in the abstract rather than trying to talk about specific commodities--it's safer that way. And he looks like the chess player Levon Aronian.

OP demonstrates a complete and utter lack of understanding of money and economics. Not surprising.

One does not hold gold because gold is an investment. One holds gold because gold is money.

Yes, I realize that dozens of 'brilliant' economic professors have taught you throughout your 'education' that gold is just a commodity and that Federal Reserve Notes and other fiat currencies are the REAL money. Unfortunately, attaining tenure as an economics professor these days pretty much requires that you be a Keynesian with no understanding of what an economy is based on.

Gold is money. The global free market, over 6,000 years of human history, has chosen gold as money. Which is to say, the majority of humans who have ever lived and participated in free commerce have chosen gold as money. And they didn't need a government to tell them to.

Now, in sound economic times, there would be no reason to hold gold. One could hold financial instruments and prosper. However, we are not living in sound economic times. We are living under a market propped up by artificially low interest rates and bailouts supplied by the Fed (ever hear of it?). We are also living under a ridiculous trade arrangement with China whereby we import consumer goods and export IOUs in the form of T-bills and Fed Reserve Notes in exchange (Gee, wonder how much longer that's gonna last?).

The world's "reserve fiat currency" (an absurd concept) is already dead. All that's required now is a prick in the bond bubble for the trillions abroad to come home to roost, and the American consumer will learn the hard way that it's dead. And make no mistake, this is all going to happen within the next decade.

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